Two major pension providers have revealed that they are looking into taking part in the secondary annuity market when it launches in April 2016.
LV and Legal & General are both looking into buying consumers’ annuities off them – though another two, Aviva and Aegon UK, have given the idea a much cooler reception.
The consultation document published by the department for work and pensions and the Treasury is open-minded about the type of company or body which buys annuities but suggests that insurance providers, pension funds and institutional investors could be attracted to it.
But John Perks, managing director of retirement solutions at LV, said pension providers could be best placed to provide this service.
“It seems complementary to what we do. I think we have natural expertise in this area,” he said.
He added: “We are comfortable with our annuitants taking this option, but we want to make sure they have got the right guidance.
“It is fairly clear that this is not a free option and it would have to be for those who seriously want to change. We already had calls about this on the day after the Budget so I think there is a lot of demand.”
Bernie Hickman, managing director of individual retirement at Legal & General, said: “Obviously it does depend on the details that come out, but on the basis that sensible decisions are taken, we would certainly be interested in participating in the market.
“There are quite a few areas of customer protection we would like to see and we are expecting advice to be needed above a certain level.
“I think the primary buyers of annuities will be the enhanced annuity writers, but how big the demand will be is the big unknown.”
According to the government’s consultation, the secondary annuity market would allow annuity holders to assign to a third party the right to their annuity payments in return for a lump sum, or to purchase a flexi-access drawdown fund or a flexible annuity.
The third party would, in return for providing this lump sum or funds to purchase an alternative product, receive what would have been the customer’s annuity income for the lifetime of the annuity holder.
Steven Cameron, regulatory strategy director at Aegon UK, said: “As the proposals take shape, there will be many different aspects we’d need to understand and evaluate – both for annuitants and from an investment perspective. At this stage it is very difficult to predict who might play.”
A spokesman for Aviva said: “We are watching the development of this proposal carefully and will engage closely with the government and regulators to consider the implications of any proposed changes.”
Adviser view
Jamie Smith-Thompson, managing director at Kent-based Portal Financial, said: “Although it is excellent news that consumers will be informed of their right to shop around, my concern is how the information will be delivered. The Association of British Insurers has been encouraging providers to explain the open market option in wake-up packs for years. However, a lack of legislation has allowed providers to bury it within the packs rather than making it clear and prominent. If the new ruling does not state how the information is to be delivered then we could just see more of the same.
“Purchasing an annuity is usually a decision that is only made once, so it is essential that the consumer makes the right choice. If Pension Wise will give details on the open market option or the stark difference in income that different annuities can provide, perhaps providers should direct consumers to the government guidance service as well as regulated advice so they at least understand the importance of shopping around.”
